Cash! You have some. Now what do you do with it?
If you’re a household, you spend it on — I don’t know, what do “normal” people buy? — paper towels, Fritos, Gap khakis and Starbucks maybe.
If you’re a corporate, you spend it on improving the lives of your workers first and everything else later. I’m just joking. This is shareholder capitalism. And this is 2024. Which means you spend it on buybacks and AI. Or AI and buybacks.
The figure below shows S&P 500 companies have rebuilt cash piles after a big drop during the Fed’s hiking cycle, when cash-rich firms used funds raised and hoarded in 2020/2021 to fund operations, thereby forestalling the need to recognize a higher cost of capital.
On Goldman’s math, cash balances for the median company rose 7% YoY over the past 12 months.
Assuming earnings growth comes somewhere close to matching the bank’s estimates for 2024 and 2025 (8% and 6%, respectively), corporates will have “incremental cash to spend,” David Kostin wrote in his latest.
Goldman expects 43% of spending will go towards returning cash to shareholders and the rest (57%) to growth investments.
The table below shows Goldman’s estimates for cash usage this year. Overall, cash spending should increase 9% to $3.69 trillion.
Buybacks will rise 13% this year thanks to the projected rebound in earnings growth, Goldman reckons. That dynamic’s especially pronounced in Tech and Comms Services. According to the bank’s buyback desk, the coporate bid’s running 50% ahead of last year’s pace YTD. Some of that’s down to relatively subdued activity in early 2023 (i.e., the comp’s easy).
Looking ahead, Kostin flagged headwinds including rich valuations and the buyback tax, but… well, suffice to say corporates aren’t exactly value investors when it comes to their own stock and that excise tax isn’t large enough to serve as a real impediment.
As for AI spend, it’s all about the so-called “megascalers.” Last year, “tech” mega-caps plus big pharma accounted for more than half of all R&D spending, as shown on the right, below.
Between then, Amazon, Microsoft, Google and Meta accounted for 16% of S&P 500 capex (on the left, above).
Investors will be listening closely this week for updates on capex plans from Meta and Microsoft. For its part, Google’s perceived as playing catch up in the AI arms race, and like most problems, the only way to remedy the situation is by throwing money at it.
“We believe AI will require significant capital investments,” Kostin remarked, on the way to noting that companies “spending the most on capex and R&D have outperformed those spending the most on buybacks and dividends” of late.
As the figure shows, that’s counter to the five-year trend.
Goldman attributed it to “a strong economic growth backdrop.” My guess is there’s a correlation with AI, which is to say the companies spending the most are also the companies investing heavily in AI. And if you want your stock to perform in the current environment, you have to make a show of riding the proverbial wave.
